Why Free Trade Works for America

U.S. Trade policy and the impact of globalization on America are
regularly the subjects of contentious debate both on Capitol Hill
and in the media, and 2007 promises more of the same. The free
Trade argument is played out between those that fear the
perceived negative effects of freer Trade on their own narrow
interests and those that embrace the economic and strategic
benefits that open market policies will bring to the economy
as a whole. Consequently, in today's policy world, free Trade
legislation passes on the margin, where every vote is
critical. The loss of even a few proponents of freer Trade
policies could result in a costly shift away from the open market
policies that have helped to bolster America's economic growth.

With free trade agreements (FTAs) with Peru, Colombia, Panama,
and South Korea needing congressional approval; Trade
Adjustment Assistance up for renewal; the struggle to advance
multilateral Trade talks in the World Trade Organization (WTO);
and, critically, the need to extend the President's Trade
promotion authority (TPA) this summer, policymakers have ample
opportunity to implement a more protectionist policy stance or
to stay the course and continue to allow America to reap the
benefits of open market policies.

Hiding from or ignoring the debate about globalization and
its effect on the U.S. will not promote a free Trade agenda.
Rather, this approach merely leaves the voice of protectionism as
the only voice heard on Trade policy issues. Instead, a firm public
commitment to advancing sound open market policies coupled with a
presentation of the facts about the effect of freer Trade and
investment on America will better help to advance the cause of open
market policies. For America to continue to reap the benefits of
globalization and to lead the world in demonstrating how
globalization progresses and evolves, the President and
Congress should make a solid and public commitment to advancing
open market policies.

Without political leadership on Trade issues, the facts behind
the benefits of America's international Trade and investment
policies will have to suffice in the battle to keep U.S. markets
open and global Trade liberalization moving forward. Not only does
Trade liberalization make sense from a theoretical perspective, but
the data show that freer Trade promotes economic growth and
prosperity.

Free Trade is about beating poverty and expanding economic
opportunity-markedly nonpartisan issues. While working through
Trade policy legislation this year, Congress will have the
opportunity to advocate free Trade and to help America and the
world reap the rewards that accrue from such policies. It is
essential that lawmakers separate myth from fact and assess
upcoming Trade initiatives objectively. Armed with the facts, they
can then help to ensure that prosperity in the U.S. and around the
world has a real chance to thrive, both this year and in the longer
term.

The Tangible Benefits of Trade

The gains from freer Trade are substantial. Today, the $12
trillion U.S. economy is bolstered by free Trade, a pillar of
America's vitality. In 2005, U.S. exports to the rest of the world
totaled $1.2 trillion and supported one in five U.S. manufacturing
jobs. jobs directly linked to the export of goods pay 13 percent to
18 percent more than other U.S. jobs.[1] Moreover, agricultural exports hit a record
high in 2005 and now account for 926,000 jobs.[2]

In Colorado, international Trade supports one of every 20
private-sector jobs and more than 16 percent of manufacturing
jobs. International Trade supports an estimated 6.1 percent of
Ohio's total private-sector employment and more than 20
percent of all manufacturing jobs. In South Carolina, Trade
supports one of every 10 private-sector jobs and more than 23
percent of manufacturing jobs.[3] State by state across America,
international Trade promotes opportunity.

The service sector accounts for roughly 79 percent of the
U.S. economy and 30 percent of the value of American exports.[4] Service
industries account for eight out of every 10 jobs in the U.S. and
provide more jobs than the rest of the economy combined. Over the
past 20 years, service industries have contributed about 40
million new jobs across America.[5]

As today's global economy offers unparalleled opportunities for
the U.S., continuing to expand Trade by lowering barriers to goods
and services is in America's economic interest. Freer Trade
policies have created a level of competition in today's open market
that engenders innovation and leads to better products,
higher-paying jobs, new markets, and increased savings and
investment. Small business, a critical component of the U.S.
economy, creates two out of every three new jobs and accounts for
about one-quarter of America's exports.[6]

With more than 95 percent of the world's consumers living
outside of the United States, the global marketplace is
important to U.S. firms. Free Trade opens the door to that
marketplace and promotes America's continuing prosperity.

For over five decades,
the U.S. has earned benefits from reducing its Trade
barriers, paving the way for substantial economic expansion and
higher standards of living. Chart 1 illustrates some specific facts
about free Trade and the U.S. economy:

The average U.S. tariff rate on all goods has fallen from over
19 percent in 1933 to 1.8 percent in 2004.

Freer Trade has been a driving force behind America's high
standard of living and promises even more if Trade barriers can be
broken down even further. The Institute for International Economics
estimates that over the past 50 years, Trade liberalization has
brought an additional $9,000 per year to the typical American
household.[7]
The North American Free Trade Agreement (NAFTA) and the Uruguay
Round of the WTO-the two major agreements of the 1990s-generate
annual benefits of $1,300-$2,000 for the average American family of
four.[8]

Freer Trade enables more goods and services to reach American
consumers at lower prices, giving families more income to save or
spend on other goods and services. Moreover, the benefits of free
Trade extend well beyond American households. Free Trade helps to
spread freedom globally, reinforces the rule of law, and
fosters economic development in poor countries. The World Bank
reports that in the 1990s, per capita real income grew three times
faster in developing countries that lowered Trade barriers than in
developing countries that did not do so. In fact, over the past 25
years, roughly 500 million people have been lifted from poverty
largely as a result of freer Trade and market reforms.[9]

U.S.Free Trade Agreements

With 150 members in the WTO, the United States benefits from the
increased market access generated by past multilateral
agreements. Along with multilateral Trade liberalization in the
WTO, regional and bilateral free trade agreements also serve as
important U.S. Trade policy tools.[10] The U.S. has been seeking comprehensive
and high-standard Trade agreements that are "tailored to reflect a
world of high technology, complex new intellectual property
standards, labor and environmental considerations, and the
growth of the service sector."[11]

While multilateral negotiations take time, FTAs allow the U.S.
to make agreements with countries that are willing to dismantle
foreign Trade barriers rapidly. In the process, FTAs formed with
different countries or regions can serve as building blocks for
broader agreements and provide institutional competition that helps
to keep multilateral talks on track.

While some countries are still working to implement more
recent Trade agreement legislation, the U.S. has already seen
impressive results. The FTAs account for more than $900 billion in
two-way Trade, which is about 36 percent of the total of U.S. Trade
with the world. U.S. exports to FTA partner countries are growing
twice as fast as U.S. exports to countries that do not share FTAs
with the U.S.[13]

The oft-demonized NAFTA has in fact generated significant gains
for the U.S. since its inception. Canada and Mexico are America's
first and second largest Trade partners, accounting for about 36
percent of all U.S. export growth in 2005.[14] Between 1993 and 2005,
U.S. manufacturing and agriculture exports to Canada and Mexico
grew by 133 percent and 55 percent, respectively. Each day, NAFTA
countries conduct roughly $2.2 billion in trilateral trade.[15] This Trade
supports U.S. jobs, bolsters productivity, and promotes
investment.

Whether the U.S. pursues freer Trade through multilateral
negotiations or through bilateral agreements, the result is
fair and beneficial for America. Similar to the objectives sought
by U.S. negotiators in the WTO, U.S. free trade agreements go
beyond winning lower tariffs on American agriculture,
manufacturing, and services exports. FTAs include provisions that
safeguard investors from discrimination, increase regulatory
transparency, protect and enforce intellectual property rights,
combat corruptive practices, protect and strengthen labor
rights, and support environmental protection. The U.S. Trade
Representative (USTR) negotiates agreements that include
transparent dispute resolution and arbitration mechanisms to
guarantee that the agreements are upheld along with the rights
of U.S. firms and consumers.

Each element of an FTA strengthens the transparent and
efficient flow of goods, services, and investments between
member countries. Both FTAs and multilateral Trade liberalization
open markets, protect investors, and increase economic
opportunity and prosperity. In short, freer Trade policies serve to
promote U.S. interests, not to weaken them or to place an unfair
burden on Americans.

Free Trade Is Fair Trade

An artificial distinction has been drawn between "free Trade"
and "fair trade." The idea that free Trade is fair only if
countries share identical labor costs and economic regulations or
if domestic producers are compensated for market losses to more
competitive foreign producers is false. The economic
benefits of free Trade derive partly from the fact that
trading partners are different, allowing any country embracing
world markets a chance to be competitive. Free Trade is fair
when countries with different advantages are allowed to Trade with
a minimum of restriction and capitalize on those differences.

Low wage costs, access to cheap capital, education levels,
and other fundamental variables all play a role in determining the
comparative advantages that one country has over another in the
global marketplace. To "fairly" equalize those differences-
provided those differences are based on a country's economic and
demographic reality-only negates or reduces a country's ability to
benefit from participating in the global Trade system.

Free Trade allows a county to compete in the global market
according to its fundamental economic strengths and to reap the
productivity and efficiency gains that promote long-run wealth and
prosperity. In reality, there is no distinction between free Trade
and truly fair trade.

To continue reaping the benefits of free Trade, the U.S. needs
to make real progress in three main areas: bilateral Trade deals,
global Trade negotiations via the WTO, and renewed presidential
authority to negotiate Trade policy.

New FTAs. Congress should start by actively supporting
negotiations on bilateral free trade agreements and ratifying
concluded agreements. The Administration and Congress should strive
to ensure the timely ratification of concluded agreements with
Peru, Colombia, Panama, and South Korea. FTA negotiations with
Malaysia and the United Arab Emirates, as well as new opportunities
with other willing partners, should be advanced. Each FTA promotes
the interests of U.S. businesses and consumers and helps to
maintain America's leadership on trade.

Completing the Doha Development Round. U.S. leadership in
the WTO and a successful conclusion of the Doha Round of
multilateral Trade negotiations are essential. Support of USTR
negotiations in the WTO and effective reform of U.S.
agriculture programs through the upcoming review of the farm
bill are important elements of achieving this goal.

The stumbling block for the Doha Round is agricultural
trade. While tariffs, quotas, subsidies, and other Trade
distortions in manufactured goods have been reduced or eliminated
since the end of World War II, protectionist agricultural policies
were allowed to remain until the Uruguay Round (1986- 1994). The
process of eliminating agricultural Trade barriers was initially
defined in the Agreement on Agriculture. The agreement called for
Trade liberalization on three fronts: market access, which
refers to the regulation of imports through various policies
such as tariffs and quotas; domestic support, which is aimed at
protecting domestic agriculture producers through production
subsidies and price support programs; and export subsidies, defined
as the various policies that directly promote agricultural
exports.

While the Uruguay Round did reduce agricultural tariffs,
market access today remains much more restricted for agricultural
products than for manufactured goods. Globally, the
trade-weighted average agricultural tariff in 2001 was more than
three times the average for merchandise trade. In the United
States, agricultural products face a level of protection that is
1.3 times the rate of manufactured items.[16] On the basis of
trade-weighted averages, the U.S. has low restrictions on foreign
agriculture, with an average ad valorem rate of 9.5 percent.
However, when extreme tariffs and tariff rate quotas (such as those
on sugar and milk) are included, U.S. tariff rates can go as high
as 350 percent. Both tariffs and tariff rate quotas are set to be
reduced under the ongoing Doha Development Round.

Subsidies supporting agriculture producers are significant and
widespread around the world. WTO members report average subsidies
totaling more than $221 billion per year,[17] which is a little more
than 18 percent of global agricultural value added.[18] Based on
World Bank and WTO data, the European Union and the United States
each contributed a little more than one-third of total
subsidies in 2001. A 2004 Cato Institute study indicates that
farmers in Organisation for Economic Co-operation and
Development (OECD) countries received $279 billion (30 percent of
total farm income) in some form of production support. U.S. farmers
received $46.5 billion (18 percent of total U.S. farm income) from
the American government.[19]

Contrary to perceptions that support goes only to small
low-income farmers, large high-income farms are increasingly the
beneficiaries of U.S. support programs. A recent U.S.
Department of Agriculture report found that both the number
and market dominance of large farms (those with sales of at least
$500,000) grew significantly between 1989 and 2003. At the same
time, the number of small farms (those with sales between $10,000
and $250,000) fell from 40 percent of all farms in 1989 to 26
percent in 2003. With structural changes and economies of scale
driving a competitive shift in farm size and earnings, commodity
payments from support programs now flow increasingly to farms with
little need for them. Large farms received 32 percent of all
commodity payments in 2003, up from 13 percent in 1989.[20]

Export subsidies are the most distorting Trade barriers;
however, they are also the least widespread of protectionist
policies implemented by countries around the world. The European
Union dominates the world in the use of export subsidies, providing
almost 90 percent of the total worldwide.[21] The U.S. ranks a distant
fourth place with less than 2 percent of all export subsidies. Due
to the market disruptions induced by such policies, WTO member
countries are required to eliminate export subsidies, with the
temporary exception of some developing nations.

Export subsidies are to be reduced under the ongoing Doha
Development Round. Global barriers to agricultural Trade
artificially prop up domestic prices for food and food products,
raising the cost of living for families in the distorted markets.
According to a 2004 OECD study, U.S. farm programs resulted in
higher food prices and had the effect of transferring more than $16
billion from American households to domestic farmers over and above
the assistance received directly from the government.[22] The Office
of Management and Budget estimates that American taxpayers paid
over $20 billion in agricultural subsidies in 2006.[23]

Barriers to agricultural Trade not only burden American
households, but also depress world prices of agricultural products,
harming farmers in developing countries and preventing them from
rising above poverty and improving their standards of living. The
U.S. argues for free Trade and economic liberalization, yet it
refuses to eliminate the very policies that would truly allow
developing countries to pursue and achieve economic
prosperity. William Cline, senior fellow at the Institute for
International Economics, estimated that by removing Trade
barriers, developed countries could convey economic benefits
to developing countries that are worth about double the amount of
their annual aid transfers.[24]

Failure to conclude the Doha Development Agenda successfully
means significant lost opportunities for economic gains for
countries around the world. Numerous studies have attempted to
measure these gains under various Trade liberalization
scenarios. While the results and methodologies differ, these
studies consistently show real economic gains associated with
further Trade liberalization. For example:

The Institute for International Economics has calculated that
moving from today's Trade environment to one characterized by
perfectly free Trade and investment would generate an
additional $500 billion ($5,000 per household) in annual U.S.
income.

A University of Michigan study has concluded that reducing
agriculture, manufacturing, and services Trade barriers by just
one-third would add $164 billion ($1,477 per household)
annually to U.S. economic activity and that completely
eliminating Trade barriers would boost U.S. annual income by $497
billion.[25]

Overall, freeing Trade stimulates economic growth, creates
better jobs, encourages innovation, and improves living standards
for millions of Americans. The World Bank estimates that the
continued reduction of tariffs on manufactured goods,
elimination of subsidies and non-tariff barriers, and a modest
10 percent to 15 percent reduction in global agricultural tariffs
would allow developing countries to gain nearly $350 billion
in additional income by 2015. Developed countries would gain
roughly $170 billion.[26]

These gains to developing countries result both from export
expansion and from reducing their own high-tariff and non-tariff
barriers. Regrettably, however, developing countries generally
believe that reducing protectionist policies at home will lead to
economic catastrophe. As a consequence, many of these
countries have thwarted progress in WTO Trade negotiations by
demanding preferential access to world markets without
embracing Trade liberalization in their domestic economies.

A 2005 Cato Institute report that examined a number of studies
on Trade and economic performance in sub-Saharan Africa
concluded that the region's poor growth rates and low measures of
economic freedom are partially a function of the countries'
protectionist policies.[27] If the countries embraced more open Trade
policies and initiated other economic reform, they would reduce
poverty and experience greater economic opportunity.

Renewing Trade Promotion Authority. TPA is vital to
strengthening the hand of the United States at the negotiating
table and provides a framework for improved consultation with the
Congress at key Trade negotiating stages. The President, regardless
of political affiliation, needs the ability to sign good Trade
deals that expand U.S. access to overseas markets and
reinforce international Trade norms.

Under TPA, formerly known as fast-track authority, Congress
can approve or reject an entire Trade agreement but cannot alter
specific provisions in the agreement. In return, the President must
fulfill certain criteria specified by Congress in each free Trade
agreement.

Beyond the requirement for negotiating robust Trade agreements,
a fundamental criterion is consultation with Congress
throughout the negotiations process. Once the Administration
decides to pursue a Trade deal, it must notify Congress at least 90
days before launching official negotiations. Relevant
congressional committees and congressional oversight groups
must be consulted about the possible FTA before and after the
notice. TPA guidelines require the Administration to consult with
Congress throughout the negotiating process. The USTR conducts
the actual negotiations.

Due to the way that TPA is implemented, countries are assured
that Congress will not amend an FTA after negotiations conclude.
Consequently, TPA enhances America's ability to negotiate
Trade agreements by ensuring that U.S. commitments are made in good
faith, minimizing the cost and uncertainty associated with the
negotiations process.

TPA is not designed to address Trade or industrial policy
concerns that may be different across Trade partners. TPA has two
primary roles: defining the basic standards of FTAs and providing
the President with the legal authority to negotiate and conclude
Trade agreements quickly and effectively. TPA sets the foundation
from which Trade talks start. As negotiations move forward, policy
concerns that are unique to the bilateral Trade relationship are
identified and addressed. Not all Trade partners are
created equal; TPA should retain the flexibility needed to
conclude FTAs that are beneficial to all parties.

Each element of an FTA strengthens the transparent and
efficient flow of goods, services, and investments between
member countries. FTAs open markets, protect investors, and
increase economic opportunity and prosperity. In short, FTAs and
the TPA legislation that defines them do not weaken U.S. interests;
they promote them.

TPA has helped the U.S. negotiate and conclude new FTAs in
an efficient and timely manner. Trade liberalization through these
FTAs and multilateral channels has significantly benefited the
American economy.

TPA should be renewed this year without extensive changes
in form. Modifying TPA opens the door to protectionist policies
aimed at saving jobs in declining industries, but Trade is not the
key issue with jobs. Exposing uncompetitive companies to the rigor
of serious competition, whether domestic or international, is not
the cause of lost jobs. A better policy is to redress the factors
that lead to uncompetitive firms.

High corporate tax rates, a relatively high minimum wage,
weak protections of property rights, corruption, and other policy
failures are the real threats to American jobs, and erecting Trade
barriers will not address these issues. Instead,
policymakers should use more appropriate policy tools to
address these concerns. America's competitive advantages in the
global market would not be served by making FTAs harder to
negotiate, but they could be improved by healthy debates on U.S.
tax and regulatory policy.

What Congress Should Do

To continue expanding economic prosperity in the U.S. and around
the world, Congress should:

Actively support U.S. negotiations on bilateral free
trade agreements;

Ratify the concluded FTAs with Peru, Colombia, Panama,
and South Korea;

Support USTR negotiations in the WTO by, among other
things, using the upcoming review of the farm bill to reform U.S.
agricultural programs; and

Renew Trade promotion authority this year without
extensive changes.

Conclusion

Armed with the facts, Congress should bolster itself against
"free Trade fatigue" and protectionist sentiment and revitalize the
drive to promote economic growth and prosperity by eliminating
international Trade barriers. Renewing the President's Trade
promotion authority to facilitate the completion of new
bilateral free trade agreements, reforming and reducing the
scope of the U.S. farm bill to promote a successful conclusion to
the WTO Doha Development Round, and generally guarding against
populist, protectionist Trade policy changes would go far toward
expanding economic opportunity in the U.S. and around the
world.

Daniella
Markheim is Jay Van Andel Senior Trade Policy Analyst in
the Center for International Trade and Economics at The Heritage
Foundation.

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Renewing the President's trade promotion authority to facilitatethe completion of bilateral free trade agreements, reforming andreducing the scope of the farm bill to promote a successfulconclusion to the WTO Doha Development Round, and guarding againstpopulist, protectionist trade policy changes would go far towardexpanding economic opportunity in the U.S. and around the world.

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